The Kiddie Tax

Updated August 3, 2026. Quick answer: the kiddie tax stops a family from parking investments in a child’s name to have the income taxed at the child’s low rate. Above a threshold, a child’s unearned income is taxed at the parents’ rate instead. It applies well past childhood — including to full-time students into their early twenties.

Who it applies to

Broadly: children under 18, and older children whose earned income does not cover more than half their support — which sweeps in full-time students under 24. That last category is the one families miss, because by then nobody is thinking of the child as a child for tax purposes.

How it works

A child’s unearned income — interest, dividends, capital gains — is divided into bands. A first slice is not taxed at all, a second slice is taxed at the child’s own rate, and everything above that is taxed at the parents’ marginal rate.

We are deliberately not printing the threshold figures. They are inflation-adjusted every year, and a stale number here would produce exactly the wrong answer. Check the current year’s amounts before relying on them; the structure above is what is stable.

What it means in practice

• Custodial accounts lose much of their point. A UTMA or UGMA holding enough to generate meaningful income is generating it at your rate, not the child’s.
• The asset is also the child’s, irrevocably — and it becomes theirs outright at the age of majority, whatever they intend to do with it.
• And it counts against aid at the student rate, which is the least favourable of the three owners. Compare the owners.

Those three together are why custodial accounts are usually the wrong vehicle for education money: taxed at the parents’ rate, assessed at the student’s rate, and no longer under the family’s control at eighteen.

What tends to work better

A 529 avoids all three problems — growth is not taxed annually, the account stays under the owner’s control, and it is assessed as a parent or grandparent asset rather than a student one. That is not a recommendation for your situation; it is the reason the comparison usually points one way.

Honest gaps

Threshold amounts, the election to report a child’s income on a parent’s return, and the interaction with a child’s earned income are not covered here. Existing custodial accounts generally cannot simply be undone, and unwinding one has its own tax consequences.

Related: retirement accounts and the FAFSA.

General information drawn from the Internal Revenue Code, Treasury regulations and IRS publications, not legal or tax advice. Thresholds and dollar figures are adjusted regularly and several of the rules here turn on facts this page cannot see, so check the current year before you act on a number.